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Bemo Securitisation launches CLON-1, the first Structured Investment Vehicle (SIV) in the Lebanese market.

Bemo Securitisation sal (BSEC) announced on Monday the 11th of November 2002, the launch of the first Structured Investment Vehicle (SIV) CLON-1 , the second Hybrid securitisation on the Lebanese financial market. This product was structured by BSEC, and co-marketed by Financial Funds Advisors International.

CLON-1 is a Currency Linked Originated Note structure whereby an SIV (Structured Investment Vehicle) issues 2 classes of notes, a Bull (B) and a Bear (A), for a total amount of $5million. The Bull and Bear notes are inversely linked and have a one-year maturity; they pay 9% or 0% depending on the occurrence of a Trigger Event. This Trigger Event is defined as a certain level of exchange rate USD/LBP. The nominal value of a single note is $1,000 for both types.

SIVs are securitisation vehicles set to benefit from certain “mismatchings” on currency, interest rates, commodities, etc, whether on the same or on different markets. These instruments are a class of structured notes that represent a specific linkage to foreign exchange values or currency rates. The linkage entails relating the value of coupon payments or principal repayments to an identified currency. SIVs are a sub-class of the Asset-Backed Commercial Paper (ABCP) asset class.

In this specific case, the originator’s (i.e. Lebanese banks) motivation stems from the very low rates paid on USD deposits in the international market versus the rates paid on USD in Lebanon. Given the low return on USD deposits abroad and the balance sheet structure of Lebanese banks with respect to currency positions, it has become efficient for banks to hedge their currency position and maximize return on assets by using structured instruments. That is why Bemo Securitisation was asked to design tailor-made hedging solutions. According to Mr. Iyad Boustany, Bemo Securitisation director and vice-president, CLON-1 Bull and Bear structure adds value on the market place. It allows local banks to increase their exposure on local currency (and hence increase their yield) and at the same time hedge such an extra exposure at no extra cost by purchasing Bear Notes. On the other hand, investors in the Bull Notes can benefit from a high return and a guaranteed principal. SIVs are the appropriate solution for the current market environment. Their interest is mainly the fact that they provide the originators and the investors with credit spreads while managing certain risks like the credit risk, the currency risk, the interest volatility, etc.

Dr. Nasri Antoine Diab, legal counsel for the structure and specialist of structured finance deals, both in Lebanon and cross-borders, declared that the Fiduciary Act No 520 of 1996 is a very efficient and flexible tool for financial structuring, and that besides technical knowledge such operations require imagination and inspiration from all the parties involved especially the lawyers. It is worth noting that he is the author with Mr Boustany, of a reference book on “Assets Securitisation in Emerging Markets”, that will soon be published in Brussels and Paris.

Mr. Abdallah Nassif, responsible for the structuring of CLON-1 said: “SIVs are bankruptcy-remote vehicles that undertake arbitrage activities by purchasing mostly low risk fixed-income assets. In this case, the Bull and Bear Notes are equally and inversely remunerated. Investors can forecast an increase (Bull), or a decrease (Bear) of the currency rate. Thereby, if the market witnesses a negative variation, the Bear noteholders will benefit from it and vice-versa.”.

As for the Credit Risk, the proceeds of the sale of both notes will be deposited in a term deposit GIC account (Guaranteed Investment Contract) with BEMO Bank who will guarantee the principal to each investor. From a credit risk point of view and according to MECG and Bilan Banques, BEMO ranks first in Lebanon in quality of earnings (88% is from pure banking business commercial/private/deposits). BEMO ranks first in earnings generation capacity, and in balance sheet strength (it ranks 1 over 63 in doubtful/gross loans). BEMO has no consumer credit exposure and fully allocates its assets to private “Top Tier” or “Blue Chip” Lebanese and regional corporations.

Mr. Jean Riachi, Chairman of FFA has declared: “ This issue follows a previous securitisation transaction that was based on Solidere’s shares launched by Bemo Securitisation and jointly marketed with FFA, in April 2002. Mr. Riad Obegi, chairman of Bemo Securitisation, and Mr. Riachi are very proud of their contribution to the modernization of Lebanon’s financial markets with the conviction that Beirut will regain its lost position as the regional financial centre.

As a financial institution registered with Central Bank, Bemo Securitisation is an investment bank focused on a specialization in Securitisation, Equity and Credit Derivatives, and Cross-border Structured Finance. BSEC is a wholly owned subsidiary of BEMO Bank, dedicated to enhancing local and regional competitiveness and providing inexpensive stable funding for performing companies in stringent business environments.